The COVID-19 pandemic has slowed down the development of offshore wind resources in 2020 due to disruptions in supply chains. Over the long-term, however, the government’s rigorous localization policy may present an even bigger impediment.
Riding high on the inauguration of its first major offshore wind farm – the 128-megawatt (MW) Formosa 1, Phase 2 project in November 2019 – Taiwan expected 2020 to be a pivotal year for its nascent offshore wind sector. Several major offshore wind developments were scheduled to be constructed and even commissioned this year, including the 109MW Tai-power Phase 1 Demonstration Project, the 376MW Formosa 2, and the massive 640MW Yunlin wind farm.
Instead, when COVID-19 spread throughout the world, becoming the deadliest pandemic in a century, it disrupted supply chains and industrial operations around the world, including offshore wind.
Taiwan immediately locked its borders and implemented strict quarantine and contact-tracing measures that earned it global recognition for effectively minimizing the spread of the virus. For the offshore wind industry, though, these same efforts resulted in costly delays and hardships for the workers installing the windfarms. As Taiwan has little capacity or experience in the offshore wind business, it relies almost entirely on foreign suppliers and crews. Factories around the world shut down on stay-at-home orders, preventing work from proceeding on essential components such as the massive foundations needed for turbines and the pin piles used to fix them to the ocean floor. Even for components that were ready for shipment, quarantine rules slowed down their transport.
For the specialized offshore wind workers that Taiwan relies on, primarily from Europe and with some from Indonesia, the stringent anti-COVID-19 measures drastically curtailed their movement, both internationally and between stints on the vessel. Many crew members were forced to remain on the vessel for as long as six months without shore leave.
Luxembourg-based marine construction company Jan De Nul, which is the EPCI (Engineering, Procurement, Construction, and Installation) contractor for the Taipower project, said by email that “the consequences of the COVID-19 pandemic have hit the project very hard,” resulting in “significant additional costs” and “substantial delays.” The company said that completion of the work in 2020, as originally scheduled, “will be very unlikely.”
The Taipower project is not alone. Wpd Taiwan Energy, a subsidiary of German energy firm wpd GmbH, likewise blames the pandemic for delays to its 640MW Yunlin offshore wind farm. “Because of the virus…and the lockdowns, we are delayed. It has impacted our construction schedule,” Wang Yuni, chair of wpd Taiwan, said at a September 2 press conference.
According to British offshore wind consultancy 4C Offshore Wind, “Almost half of ongoing projects face costly delays with developers pushing back commissioning schedules by a year.” Local offshore wind consultants who requested anonymity due to the sensitivity of their positions say that with few contractors able to operate in this sector, many of the same marine construction and engineering firms – mostly from Europe – are committed to working on multiple consecutive projects. Delays in one project will therefore likely have knock-on effects for later projects.
Not everyone agrees that the pandemic-wrought delays will be significant over the long term, however.
“At this time, everything is going according to plan,” assures Bureau of Energy Deputy Director Lee Chun-li. He says that although the industry has seen some slowdowns in the current pre-construction stage, the construction phase is typically the fastest portion of the offshore wind development process. “Until now maybe some projects are a little slow, but when projects like Tai-power Changhua Phase 1 and wpd go into the construction stage, we have confidence that we can hit our target.”
The pandemic aside, delays in the construction and installation of massive infrastructure projects are a common occurrence. Global analytics firm McKinsey & Co. observed in a 2015 report that “98 percent of megaprojects suffer cost overruns of more than 30 percent; 77 percent are at least 40 percent late.”
“Delays in any construction site and in offshore wind are quite normal, and everybody applauds when a project is delivered on time, which means it’s unique” says Edgare Kirkwijk, managing director of Asia Green Capital and a board member of the Asia Wind Energy Association. “The delays I’ve seen are understandable.”
Industry insiders note that offshore wind took nearly three decades to reach maturity in Europe, and even in the U.S. most offshore wind projects face significant delays. Taiwan’s rollout of the local offshore wind industry has received wide attention for its ambitious scope and timeline.
“The political framework and the timeline for the tenders was always very ambitious, and much faster and more effective than in Europe,” said wpd COO Achim Berge Olsen at a press conference on September 3.
These early delays are occurring within the context of Taiwan’s overall energy transition in which offshore wind plays a crucial role. Taiwan is aiming for 5.7 gigawatts (GW) of installed offshore wind generating capacity – over 600 turbines – by 2025. That would entail a total investment of US$20 billion and enable offshore wind to contribute as much as 8% of Taiwan’s power supply. Nuclear power facilities, currently responsible for some 12% of Taiwan’s total power generation, will be completely shut down by the end of 2025, making the anticipated 21,000 gigawatt-hours (GWh) a year of offshore wind power vital to meeting Taiwan’s overall power needs.
But given the delays already occurring, it remains unclear just how much of the remaining 5.57GW of installed wind capacity power will be available by the target date. Further, while GDP growth has fallen since the pandemic, the return of industrial investment to Taiwan along with Taiwan Semiconductor Manufacturing Company’s new high-end IC packaging and testing plant being built in Miaoli County may increase power demand.
The localization challenge
The pandemic-related delays are not the only factor potentially affecting the wind projects’ timeline. What the industry regards as Taiwan’s rigid and inefficient localization policy may turn out to be equally important.
Developers are finding it very hard to meet the scheduling targets set by the government, “mostly due to the localization requirement,” says Tom Manning, deputy general manager of CWind Taiwan, a subsidiary of UK firm CWind. “You just can’t develop a wind farm on the scale that they envision without first developing the skill set.”
To jumpstart its offshore wind sector, Taiwan is offering a generous Feed-in-Tariff, including a rate of NT$5.0946 per kilowatt-hour (kWh) for electricity generated from the first 3.8GW of installed capacity. Revenues could add up to billions of NT dollars over the course of 20-year Power Purchasing Agreements. Like every other country that has entered the offshore wind sector, Taiwan is demanding a substantial localization of the industry to ensure that some of this money is channeled into the local economy.
Developers are required to submit their localization plans for approval by the Industrial Development Bureau (IDB) under the Ministry of Economic Affairs, which has specified a list of components that must be sourced in Taiwan, along with the names of potential local suppliers. Among the items on the list are turbine components, foundations, and marine engineering vessels.
The development of a local supply chain is intended to support not only Taiwan’s offshore wind sector but that of the entire burgeoning Asia-Pacific region. The Global Wind Energy Council forecasts huge growth in regional offshore wind development over the next decade, including 7.9GW in installed capacity for South Korea, 7.4GW for Japan, and 5.2GW for Vietnam. Taiwan is well ahead of all these markets in the offshore wind development curve and presumes that its first-mover status will enable it to establish itself as a regional hub.
At the inauguration ceremony at the Formosa 1 Offshore Wind Farm, President Tsai Ing-wen outlined the government’s localization strategy. “Taiwan’s green energy firms will be able to develop in the domestic market, and then use the expertise they have developed to pursue business opportunities around the world,” she said.
The localization policy has generated some successes. Examples include the Siemens Gamesa cluster in Taichung to assemble nacelles (the turbine housing coverings) and the Ming Rong Yuan Business Company’s project to manufacture pin piles.
But Taiwan’s lack of experience in offshore wind or marine industries such as offshore oil and gas puts the localization of the supply chain at a disadvantage, particularly as developers face accelerated schedules to get their projects commissioned in time to meet future power demand needs. Taiwanese manufacturers have struggled to meet both the scale and quality requirements for offshore wind, disrupting development plans. There have even been scandals in which steelmakers were accused of buying components abroad and labeling them “Made in Taiwan,” instead of investing in the capacity to manufacture them locally
Because of the difficulties, many domestic companies have been reluctant to enter the offshore wind industry, with the result that the localization effort has been spearheaded by big state-affiliated enterprises such as China Steel and shipbuilder CSBC.
“The government is trying to push localization, but people are not getting very enthusiastic,” says Asia Green Capital’s Kirkwijk. “I see a lot more initiatives taking place, but it’s driven by the developers who are obliged to do this.”
Local companies’ hesitancy is partly explained by the relatively small scale of the market at present. Even the Phase 3 auctions coming up for an additional 10 GW of offshore wind between 2026 and 2035 will only add around 100 turbines annually. GE Grid Solutions, noted in an interview with Wind Taiwan Magazine that localization requirements will slow the entire development and construction process, delaying returns on investment and making Taiwan a less attractive market. GE noted that an investment in Taiwan’s offshore wind capacity might require 1.3 to 1.5 times the amount of money compared to a similar investment in a leading offshore wind market.
Taiwan’s plan has been to offset this lack of local market scale by developing Taiwan into a regional offshore wind hub. However, according to a written statement by Ørsted Taiwan, a major player in Taiwan’s offshore wind sector, “the current rigid item-based local content policy will not realize the ultimate policy objective of bringing Taiwanese suppliers to the international market.” Instead, the Danish-invested company says, the program would “create a protective bubble for the local suppliers and enclose Taiwan as a small closed market” that would provide few opportunities for Taiwanese suppliers to compete internationally and “is not aligned with the government’s aspiration of making Taiwan a key offshore wind market in the Asia Pacific Region.”
Jan De Nul noted in email correspondence that “mandatory local supply also suppresses much needed competition, a key factor in driving down costs,” and that the notion of turning Taiwan into a regional hub for offshore wind “is paradoxical.”
“Where will the Taiwanese supply chain export to if other markets in the region are enforcing localization requirements too?,” asks the company.
Further, several of the future offshore wind markets that Taiwanese firms would presumably target, such as South Korea and Japan, are already supplying many of the components needed by Taiwan’s offshore wind sector.
CWind’s Manning suggests that the localization policy be made more holistic, incorporating not only manufacturing and construction but also operations and maintenance. “Even the biggest wind farms never take more than a couple of years for construction,” he says, but once built, they have to be operated and maintained for 20 or 25 years. Although less capital investment is involved, these functions “require all of the same skills and the same asset investment,” he says. “But none of that creeps into the localization checklist here.”
For its part, Ørsted recommends that the local content policy for the third-round auctions “incorporate more flexibilities and introduce market elements to enhance the capabilities and competitiveness of the local supply chain.”
Regardless of the government’s policy direction, Asia Wind Energy’s Kirkwijk predicts that a local offshore wind industry will emerge. “Developers cannot rely for the next five years on only foreign equipment, foreign expertise, foreign vessels,” he says. “Where in the world would you have only foreigners doing an industry for decades to come? It will not happen.”